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Horizontal Multinational Firms, Vertical Multinational Firms and Domestic Investment

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  • Julian Emami Namini

    (Erasmus University Rotterdam)

  • Enrico Pennings

    (Erasmus University Rotterdam)

Abstract

We build a dynamic general equilibrium model with 2 countries, horizontal and vertical multinational activity and endogenous domestic and foreign investment. It is found that horizontal multinational activity always leads to a complementary relationship between domestic and foreign investment. Vertical multinational activity, in contrast, leads to either a substitutional or complementary relationship between domestic and foreign investment, depending on the firms' technologies. We test the theoretical implications with a panel of U.S. multinationals and find empirical support.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 09-004/2.

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Date of creation: 15 Jan 2009
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Handle: RePEc:dgr:uvatin:20090004

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Web page: http://www.tinbergen.nl

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Keywords: Horizontal multinational firms; vertical multinational firms; domestic investments; neoclassical growth model;

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  1. R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
  2. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  3. Martin S. Feldstein, 1995. "The Effects of Outbound Foreign Direct Investment on the Domestic Capital Stock," NBER Chapters, National Bureau of Economic Research, Inc, in: The Effects of Taxation on Multinational Corporations, pages 43-66 National Bureau of Economic Research, Inc.
  4. Arndt, Christian & Buch, Claudia M. & Schnitzer, Monika, 2007. "FDI and Domestic Investment: An Industry-Level View," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University 212, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  5. Braunerhjelm, Pontus & Oxelheim, Lars & Thulin, Per, 2004. "The Relationship between Domestic and Outward Foreign Direct Investment: The Role of Industry-Specific Effects," Working Paper Series, Research Institute of Industrial Economics 625, Research Institute of Industrial Economics.
  6. Herzer, Dierk & Schrooten, Mechthild, 2008. "Outward FDI and domestic investment in two industrialized countries," Economics Letters, Elsevier, Elsevier, vol. 99(1), pages 139-143, April.
  7. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, Elsevier, vol. 68(1), pages 29-51, July.
  8. David Hummels & Dana Rapoport & Kei-Mu Yi, 1998. "Vertical specialization and the changing nature of world trade," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Jun, pages 79-99.
  9. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS), University of Warwick, Department of Economics 64, University of Warwick, Department of Economics.
  10. Blomstrom, Magnus & Kokko, Ari, 1997. "How foreign investment affects host countries," Policy Research Working Paper Series 1745, The World Bank.
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